Forecasting
Categories: Company Management, Metrics
Guessing. But with intel behind the guesses. Like...what will inflation look like the next 3 quarters? What will Coke's earnings run the next 2 years? Will we still be electing idiots for Congress?
Yeah. Some forecasting is easier than others.
Forecasting is the use of historic data to determine the direction of future trends. Businesses utilize forecasting to determine how to allocate their budgets or plan for anticipated expenses for an upcoming period of time. This is typically based on the projected demand for the goods and services they offer.
At its heart then, what is forecasting? One better than...threecasting?
In a financial sense, forecasting isn’t all that different from the crazed, witchy ramblings of a medium in a seance, divining your future dating life...which she intones will be cloudy with a chance of rejection.
Companies forecast future revenues and profits as driven by sales volumes. And the pricing of whatever products they are movin’ out the door. Why? Like...why bother? You sell so many units of your product...what can you do about it?
Well, in practice…plenty. Let's say you won huge discounts in extruded plastic volumes for your Sneeze Guard business: The Snot Thickens...in return for ordering 5 years’ supply. Your supplier loved knowing well in advance what the demand would be for their extruded plastic so that it could negotiate with its unions, its plastic mining contracts, its natural gas supplier to melt down the plastic, etc.
So in return for a lot of commitment…came a lot of discounting. You’ve now committed to buy 5 years’ worth of extruded plastic supplies, no matter what. Like...25 tons this year, 30 tons next, 35 the next, and so on. But after year 2, the economy softens and buffets have decided to cave in to the germs. They just aren't buying enough sneeze guards to warrant your commitment of 35 tons of extruded plastic.
What can you do?
a) Cry
b) Whine and blame Washington
c) Spend money on marketing and discounting to just “get through it”
Yeah, it’s “C.”
You’re on the hook for 35 tons, so rather than have it just pile up in the back of the factory, you lower prices and spend a bit more on marketing, and instead of only needing 27 tons, you stimulate demand for 32 tons. And yes, that's 3 tons less than you really wanted to have to sell, but it’s not terrible...and 3 tons of plastic fits right here in the back of the factory yard. Yeah, that stuff is heavy.
So through forecasting, which lets you know very early the softness in market demand for your sneeze guards, you were able to stave off what could have been a calamitous slow down...or even shut down...in production. And that’s nothing to sneeze at.
Gesundheit.
Related or Semi-related Video
Finance: What is forecasting?8 Views
Finance allah shmoop what is forecasting one better than three
casting Okay so forecasting in a financial sense isn't all
that different from the crazed witchy ramblings of a medium
in a say aunts divine ing your future dating life
not necessarily on tinder which she and tones will be
cloudy with a chance of rejection Our company's forecast future
revenues and profits as driven by sales volumes and usually
and the pricing of whatever products they're moving out the
door Why like why bother Well you sell so many
units of your product what can you do about it
Well in practice there's plenty you can do about it
Let's say you won huge discounts and extruded plastic volumes
for your sneeze guard business The snot thickens any way
at all that you get in return for ordering five
years supply Your supplier loved knowing well in advance what
the demand would be for their extruded plastic so that
it could negotiate with its unions It's plastic mining contracts
its natural gas supplier teo melt the plastic and so
on So in return for a lot of commitment came
a lot of discounting You've now committed to buy five
years worth of extruded plastic supplies no matter what Like
twenty five tons this year thirty tons next thirty five
the next and so on But after year to the
economy softens and buffets have decided to cave to the
germs They aren't just buying enough sneeze guards Toe warrant
your commitment of thirty five tons of extruded plastic Well
what can you dio a cry Yes you always do
that Be wine and blame washington That's a good one
that always works Or see Spend money on marketing and
discounting to just quote get through it unquote So yeah
the answer to see you're on the hook for thirty
five tons no matter what So rather than have it
just pile up in the back of a factory you
lower prices and spend a bit more on marketing And
instead of only needing a twenty seven tons that the
existing market would have had you send out the door
you stimulated demand Five tonnes worth They now have thirty
two tons needed Teo get sent out for snot guards
and yes that three tons less And you really wanted
to sell But it's not terrible You don't go bankrupt
in three tons of plastic fits right here in the
back of the factory yard Thing neither Yeah that stuff
is heavy So through forecasting which letyou know very early
the softness in the market demand for your sneeze guards
you were able to stave off what could have been
a calamitous slow down or even shutdown bankruptcy or whatever
in production Yeah and that's nothing to sneeze at Gross